Previously in a post in this blog we dealt with the Non-Disclosure Agreement, which in broad terms is about the agreement that the involved parties sign, in order for one or both of them, to refrain from sharing sensitive or classified information about the business at stake with third parties. Thus, avoiding damages that may be eventually suffered by the proprietary of the information from the action of third parties.

Now, what happens when a partner, founder or worker, for any reason, leaves the company? This individual could keep abiding by an NDA, but, this does not prevent the former worker to start his own endeavour taking advantage of the developed and acquired knowledge in his former job. Hence, directly competing with his previous employer.

In order to protect companies and mostly Startups –since these normally develop or plan to develop innovative activities that do not have many direct competition within the market- is that emerges the Non-Compete Agreement.

Normally this consists in a clause within a broader employment contract, when we are in the situation of an employer-employee relationship, or, in the company bylaws or as an addendum, in the case of the founders; which prohibits them to start the development of an economic activity or the performance of the same or a similar role in another company which is the same as the one that was carried out within the former company.

The hardships that this agreement involve are related to the limitations that this would mean for a former employee to undertake a new job that allows him to earn a living, eventually conflicting with constitutional norms, in the Chilean case the article article 19 nº 21 of our Constitution. (Freedom of employment and the freedom for choosing a job). That is why its lawfulness may be put to the test.

Nevertheless, due to the absence of regulation in Chilean law, meaning that it is not forbidden, thus by default, legal. However, some considerations have to be taken into account when agreeing upon this clause, being of the essence the specification of its scope, time and place. This specificity is always established according to the reasonableness its application should have for the particular business, hence, its implementation will always be case study based.

In this sense, national Courts have decided on these clauses in conformity with the requirements that compared law mandates for them to be considered valid, these being, the financial compensation for the employee, in order to cover the loss of profit he would have earned if he was able to work for another employer. The concern for the non-use of any knowledge acquired, in another similar endeavour, which may implicate a pecuniary loss, therefore protecting the company’s information, which in turn constitutes a lawful cause (causa lícita) and lastly, that the prohibition established in the clause has a certain and reasonable timespan.

Our courts have understood the Non-Compete Agreement in this manner, valid and lawful.

Francisco Mulatti, Lawyer.

Photo: Ray Hennessy (CC0)